
[Federal Register Volume 76, Number 238 (Monday, December 12, 2011)]
[Notices]
[Pages 77275-77277]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31736]



[[Page 77275]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65900; File No. SR-ISE-2011-82]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Relating to Legging 
Orders

December 6, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 29, 2011, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared by 
the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add a new order type called ``legging 
orders.'' The text of the proposed rule change is as follows (additions 
are in italics and deletions are [bracketed]):

Rule 715. Types of Orders

    (a) through (j) no change.
    (k) [Reserved.] Legging Orders. A legging order is a limit order 
on the regular limit order book that represents one side of a 
complex order that is to buy or sell an equal quantity of two 
options series resting on the Exchange's complex order book. Legging 
orders are firm orders that are included in the Exchange's displayed 
best bid or offer.
    (1) A legging order may be automatically generated for one leg 
of a complex order at a price: (i) that matches or improves upon the 
best displayed bid or offer on the regular limit order book; and 
(ii) at which the net price can be achieved when the other leg is 
executed against the best displayed bid or offer on the regular 
limit order book. A legging order will not be created at a price 
that locks or crosses the best bid or offer of another exchange.
    (2) A legging order is executed only after all other executable 
orders (including any non-displayed size) and quotes at the same 
price are executed in full. When a legging order is executed, the 
other portion of the complex order will be automatically executed 
against the displayed best bid or offer on the Exchange.
    (3) A legging order is automatically removed from the regular 
limit order book if: (i) the price of the legging order is no longer 
at the displayed best bid or offer on the regular limit order book, 
(ii) execution of the legging order would no longer achieve the net 
price of the complex order when the other leg is executed against 
the best displayed bid or offer on the regular limit order book, 
(iii) the complex order is executed in full or in part against 
another complex order on the complex order book, or (iv) the complex 
order is cancelled or modified.
    (l) and (m) no change.

Supplementary Material to Rule 715

    .01 through .02 no change.
* * * * *

Rule 722. Complex Orders

    (a) no change.
    (b) Applicability of Exchange Rules. Except as otherwise 
provided in this Rule, complex orders shall be subject to all other 
Exchange Rules that pertain to orders generally.
    (1) and (2) no change.
    (3) Execution of Orders. Complex orders will be executed without 
consideration of any prices that might be available on other 
exchanges trading the same options contracts.
    (i) no change.
    (ii) Complex orders will be automatically executed against bids 
and offers on the Exchange for the individual legs of the complex 
order provided the complex order can be executed in full or in a 
permissible ratio by such bids and offers. Legging orders may be 
automatically generated on behalf of complex orders so that they are 
represented at the best bid and/or offer on the Exchange for the 
individual legs as provided in Rule 715(k).
    (iii) no change.
    (4) No change.

Supplementary Material to Rule 722

    .01 through .05 no change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt a new order type called ``legging 
orders'' to provide additional liquidity for complex orders resting on 
the complex order book. A complex order resting on the complex order 
book may be executed either by: (i) Trading against an incoming complex 
order that is marketable against the resting complex order, or (ii) 
legging into the market when the net price of the complex order can be 
satisfied by executing all of the legs against the best bids or offers 
on the Exchange for the individual options series. Legging orders are 
designed to increase the opportunity for complex orders to leg into the 
market.
    Specifically, a legging order is an order on the regular order book 
in an individual series that represents a leg of a two-legged complex 
options order.\3\ A legging order may be automatically generated for 
one leg of a complex order at a price: (i) That matches or improves 
upon the best displayed bid or offer on the regular limit order book; 
and (ii) at which the net price can be achieved when the other leg is 
executed against the best displayed bid or offer on the regular limit 
order book. For example:
---------------------------------------------------------------------------

    \3\ Legging Orders will not be generated for market maker quotes 
on the complex order book, as such quotes cannot leg into the 
market. ISE Rule 722, Supplementary Material .03.

    A complex order to buy 10 series 1 (S1) and to buy 10 series 2 
(S2) at a net price of $2.25 (buy S1/S2 10 @ $2.25) is entered into 
the complex order book and there is no off-setting complex order to 
sell.
    The complex order cannot leg into the regular market because the 
BBO net price available for the complex order on the ISE's regular 
order book is $2.40 as follows:

------------------------------------------------------------------------
              ISE bid                             ISE offer
------------------------------------------------------------------------
S1 10 @ $1.00                        20 @ $1.20
S2 10 @ $1.00                        20 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + buy S2 @ $1.20 = $2.40 net)
    Legging orders to buy 10 S1 @ $1.05 and 10 S2 @ $1.05 may be 
automatically generated, improving the ISE's best bid for both S1 
and S2 to $1.05:

------------------------------------------------------------------------
              ISE bid                             ISE offer
------------------------------------------------------------------------
S1 10 @ $1.05                        20 @ $1.20
 (legging order)
S2 10 @ $1.05                        20 @ $1.20
 (legging order)
------------------------------------------------------------------------

    If a marketable order to sell 10 S1 is received, it will execute 
against the legging order to buy S1 at $1.05, there will be an 
automatic execution of the other leg of the complex order against 
the displayed offer for S2 at $1.20, and the legging order to buy S2 
at $1.05 will be automatically cancelled. As a result, the net price 
of $2.25 is achieved for the complex order (buy S1 @ $1.05 + buy S2 
@ $1.20 = $2.25 net).\4\
---------------------------------------------------------------------------

    \4\ If a marketable order to sell 10 S2 is received, it will 
execute against the legging order to buy S2 at $1.05, there will be 
an automatic execution of the other leg of the complex order against 
the displayed offer for S1 at $1.20, and the legging order to buy S1 
at $1.05 will be automatically cancelled. As a result, the net price 
of $2.25 is achieved for the complex order (buy S1 @ $1.20 + buy S2 
@ $1.05 = $2.25 net).

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[[Page 77276]]

    Following the execution of the complex order, the ISE BBO is:

------------------------------------------------------------------------
                ISE bid                             ISE offer
------------------------------------------------------------------------
S1 10 @ $1.00                           20 @ $1.20
S2 10 @ $1.00                           10 @ $1.20
------------------------------------------------------------------------

    In addition to enabling the execution of the complex order at a 
net price of $2.25, the legging order enhanced execution for orders 
in the regular order book as (i) The incoming marketable order to 
sell S1 received a better price ($1.05 instead of $1.00), and (ii) 
liquidity to execute resting interest to sell 10 S2 at $1.20 was 
provided by the complex order.

    A legging order is executed only after all other executable orders 
(including any non-displayed size) and quotes at the same price are 
executed in full. Accordingly, the generation of a legging order will 
not affect the existing priority, or execution opportunities, currently 
provided to participants in the regular market in any way. For example:

    A complex order to buy 50 S1 and to buy 50 S2 at a net price of 
$2.25 (buy S1/S2 50 @ $2.25) is entered into the complex order book 
and there is no off-setting complex order to sell.
    The complex order cannot leg into the regular market because the 
BBO net price available for the complex order on the ISE's regular 
order book is $2.40 as follows:

------------------------------------------------------------------------
                ISE bid                             ISE offer
------------------------------------------------------------------------
S1 40 @ $1.05                           60 @ $1.20
S2 20 @ $1.05                           80 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + buy S2 @ $1.20 = $2.40 net)
    Legging orders to buy 50 S1 @ $1.05 and 50 S2 @ $1.05 may be 
automatically generated, increasing the size of the ISE's best bid 
for both S1 and S2 as follows:

------------------------------------------------------------------------
                ISE bid                             ISE offer
------------------------------------------------------------------------
S1 90 @ $1.05                           60 @ $1.20
 (50 legging order)
S2 70 @ $1.05                           80 @ $1.20
 (50 legging order)
------------------------------------------------------------------------

    If a marketable order to sell 30 S1 is received, it will execute 
against the orders and/or quotes at $1.05 other than the legging 
order pursuant to the Exchange's regular allocation algorithm,\5\ 
and the size of the bid for S1 will be reduced to 60 contracts as 
follows:
---------------------------------------------------------------------------

    \5\ See ISE Rule 713.

------------------------------------------------------------------------
                ISE bid                             ISE offer
------------------------------------------------------------------------
S1 60 @ $1.05                           60 @ $1.20
 (50 legging order)
S2 70 @ $1.05                           80 @ $1.20
 (50 legging order)
------------------------------------------------------------------------

    If a marketable order to sell 50 S1 were then received, it will 
first execute the remaining 10 S1 from the orders and/or quotes at 
$1.05 that are not the legging order, and then execute 40 S1 against 
the legging order.
    At this time, the complex order will also execute 40 S2 at 
$1.20, and the legging order to buy 50 S2 will be reduced 
automatically to 10 contracts. As a result, the net price of $2.25 
is achieved for a partial execution of the complex order (buy 40 S1 
@ $1.05 + buy 40 S2 @ 1.20 = 40 @ $2.25 net).
    Following the partial execution of the complex order, the ISE 
BBO is:

------------------------------------------------------------------------
                ISE bid                             ISE offer
------------------------------------------------------------------------
S1 10 @ $1.05                           60 @ $1.20
 (legging order)
S2 30 @ $1.05                           40 @ $1.20
 (10 legging order)
------------------------------------------------------------------------

    A legging order will be removed from the regular limit order book 
automatically if: (i) The price of the legging order is no longer at 
the displayed best bid or offer on the Exchange's regular limit order 
book, (ii) execution of the legging order would no longer achieve the 
net price of the complex order when the other leg is executed against 
the best displayed bid or offer on the regular limit order book, (iii) 
the complex order is executed in full or in part against another 
complex order on the complex order book, or (iv) the complex order is 
cancelled or modified. For example:

    A complex order to buy 20 S1 and to buy 20 S2 at a net price of 
$2.25 (buy S1/S2 20 @ $2.25) is entered into the complex order book 
and there is no off-setting complex order to sell.
    The complex order cannot leg into the regular market because the 
BBO net price available for the complex order on the ISE's regular 
order book is $2.40 as follows:

------------------------------------------------------------------------
              ISE bid                             ISE offer
------------------------------------------------------------------------
S1 10 @ $1.05                        20 @ $1.20
S2 10 @ $1.05                        50 @ $1.20
------------------------------------------------------------------------

 (buy S1 @ $1.20 + buy S2 @ $1.20 = $2.40 net)
    Legging orders to buy 20 S1 @ $1.05 and 20 S2 @ $1.05 may be 
automatically generated, increasing the size of the ISE's best bid 
for both S1 and S2 as follows:

------------------------------------------------------------------------
                ISE bid                             ISE offer
------------------------------------------------------------------------
S1 30 @ $1.05                           20 @ $1.20
 (20 legging order)
S2 30 @ $1.05                           50 @ $1.20
 (20 legging order)
------------------------------------------------------------------------

    If a limit order to buy 10 S1 @ $1.10 is received, the legging 
order to buy 20 S1 at $1.05 will be cancelled because it is no 
longer at the ISE best bid.

------------------------------------------------------------------------
                ISE bid                             ISE offer
------------------------------------------------------------------------
S1 10 @ $1.10                           20 @ $1.20
S2 30 @ $1.05                           50 @ $1.20
 (20 legging order)
------------------------------------------------------------------------

    If a marketable order to buy 20 S1 is received, the ISE best 
offer will move above $1.20, resulting in the cancellation of the 
legging order to buy S2 at $1.05 because the net price of $2.25 can 
no longer be achieved.

------------------------------------------------------------------------
              ISE bid                             ISE offer
------------------------------------------------------------------------
S1 10 @ $1.10                        10 @ $1.25
S2 10 @ $1.05                        50 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.25 + buy S2 at $1.05 = $2.30 net)

    The proposed rule specifies when a legging order can be generated. 
Specifically, legging orders may be generated only for simple two-
legged options orders with the same quantity on both legs, and there 
can be only one legging order to buy in a series. Moreover, legging 
orders will not be generated at a price that would lock or cross the 
price of an away market. In addition to these limitations, the Exchange 
will carefully manage and curtail the number of legging orders being 
generated so that they do not negatively impact system capacity and 
performance.\6\ Accordingly, legging orders may not be generated for 
all eligible complex orders resting on the complex order book.
---------------------------------------------------------------------------

    \6\ The ISE will curtail the number of legging orders on an 
objective basis, such as limiting the number of orders generated in 
a particular class. The Exchange will not limit the generation of 
legging orders on the basis of the entering participant or the 
participant category of the order (i.e., professional, professional 
customer, or public customer).
---------------------------------------------------------------------------

2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under requirement under [sic] Section 6(b),\7\ in general, 
and Section 6(b)(5) \8\ in particular, that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Exchange believes that the proposal is reasonably 
designed to benefit investors by increasing the opportunity for

[[Page 77277]]

complex orders to receive an execution, while also enhancing execution 
quality for orders in the regular market.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes that automatically generating 
legging orders, which will only be executed after all other executable 
interest at the same price (including non-displayed interest) is 
executed in full, will provide additional execution opportunities for 
complex orders, without negatively impacting any investors in the 
regular market. In fact, the generation of legging orders may enhance 
execution quality for investors in the regular market by improving the 
price and/or size of the ISE BBO and by providing additional execution 
opportunity for resting orders on the regular order book.
    The Exchange also believes that the generation of legging orders is 
fully compliant with all regulatory requirements. In particular, 
legging orders are firm orders that will be displayed at the ISE BBO. A 
legging order will be automatically removed if it is no longer 
displayable at the ISE BBO or if the net price of the complex order can 
no longer be achieved. Moreover, to assure compliance with intermarket 
rules, a legging order will not be generated at a price that would lock 
or cross another market. Finally, the generation of legging orders is 
limited in scope, as they may be generated only for complex options 
orders with two legs. Additionally, the Exchange will closely manage 
and curtail the generation of legging orders to assure that they do not 
negatively impact system capacity and performance.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) As the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2011-82 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2011-82. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2011-82 and should be 
submitted on or before January 3, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-31736 Filed 12-9-11; 8:45 am]
BILLING CODE 8011-01-P


